OPKO Health, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. OPKO is a diversified healthcare company with diagnostics operations, primarily BioReference Laboratories, and pharmaceutical products and development programs, including Rayaldee and hGH-CTP.
Financial performance and position
Amounts below are in millions of dollars except per-share data. Margins are approximate calculations from reported figures.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $226.4 | $263.7 | $448.8 | $518.6 |
| Gross profit / margin | $82.1 / 36.3% | $113.6 / 43.1% | $160.5 / 35.8% | $214.4 / 41.3% |
| Operating loss / margin | ($47.3) / (20.9%) | ($5.1) / (1.9%) | ($122.6) / (27.3%) | ($47.7) / (9.2%) |
| Net loss | ($59.8) | ($6.2) | ($140.6) | ($49.3) |
| Loss per share | ($0.10) | ($0.01) | ($0.24) | ($0.09) |
| Cash used in operations | Not separately presented for quarter | ($102.6) | ($52.6) |
- Q2 service revenue was $178.5 million, product revenue $28.7 million, and intellectual-property and other revenue $19.2 million. For the first half, those amounts were $357.3 million, $54.0 million, and $37.5 million, respectively.
- At June 30, cash and cash equivalents were $111.1 million; current assets were $344.2 million and current liabilities $283.4 million (approximate current ratio 1.21). Total assets were $2.456 billion and total liabilities $747.3 million.
- Debt included $200 million principal of 2025 convertible notes, $55 million of 2023 convertible notes, approximately $3.1 million of remaining 2033 notes, and $74.0 million outstanding under lines of credit. The 2025 notes carry a 4.50% coupon, with an initial conversion price of about $4.22; their accounting carrying value was $144.4 million after discount and issuance costs.
- Management reported $92.7 million of total availability under the revolving credit and other lines, of which $74.0 million was used; only $1.7 million was additionally available under BioReference’s JPMorgan facility at June 30. The filing also says the facilities’ availability depends on borrowing-base and other conditions.
Material changes versus the prior comparable period
- Q2 revenue fell $37.3 million (14%); first-half revenue fell $69.8 million (13%). Service revenue declined $37.6 million in Q2 and $70.0 million in the first half, chiefly from lower reimbursement, increased denials and payor pricing or policy changes, PAMA effects, and reduced 4Kscore revenue following a Medicare non-coverage determination.
- Product revenue was broadly flat in Q2 but declined $2.4 million for the first half, partly reflecting product availability in Chile; Rayaldee growth partly offset the decline. Q2 Rayaldee net sales were $5.7 million, versus $4.8 million a year earlier; first-half sales were $11.5 million versus $8.5 million.
- Cost of revenue declined, including from BioReference efficiency initiatives, but not enough to offset the revenue decline; gross margin narrowed. Operating loss and net loss increased substantially.
- First-half SG&A increased $4.5 million, including $12.6 million of expenses related to legal matters, partly offset by BioReference cost reductions. R&D increased $2.7 million, primarily due to hGH-CTP costs, partly offset by collaboration funding.
- Cash used in operations nearly doubled year over year. The $200 million 2025-note offering generated $192.5 million net proceeds and helped fund repayment of $28.8 million of 2033 notes and other financing needs. Interest expense for the first half rose to $10.3 million from $5.0 million.
Outlook, risks and unusual items
- Management said cash on hand, credit availability and 2025-note proceeds were expected to meet anticipated operating and debt-service requirements beyond the next 12 months, but emphasized that estimates depend on assumptions and that additional funding may be needed. OPKO has not generated sustained positive operating cash flow and expects substantial R&D spending; it also expects SG&A to rise as it expands commercial and administrative operations.
- Novitas issued a proposed local coverage determination that could reimburse 4Kscore for patients meeting specified criteria, with comments open through August 11, 2019. OPKO planned to submit a PMA application in August after withdrawing its de novo request; the filing says FDA had not requested additional clinical data or trials. Coverage and regulatory outcomes remain uncertain.
- BioReference’s results were below forecast, and OPKO warned that sustained weakness or inadequate 4Kscore reimbursement could lead to a significant BioReference goodwill impairment. Goodwill was $699.8 million at June 30, including $401.8 million attributed to BioReference.
- hGH-CTP development costs and duration exceeded OPKO’s estimates and agreed cap. Failure to agree with Pfizer on cost overruns, unsuccessful development, or termination or lack of commercialization could materially harm expected benefits; the related in-process R&D asset may also be exposed to impairment. The adult Phase 3 study had not met its primary endpoint in the original analysis; post-hoc analyses were mixed, and OPKO continued evaluating regulatory strategy.
- On August 6, 2019, BioReference amended its credit agreement so the fixed-charge coverage ratio would not be tested for Q2 or, subject to conditions, the quarter ending September 30, 2019. This covenant accommodation is a notable liquidity and lender-monitoring item.
- BioReference reported a third-party collections vendor data incident involving patient contact, service and balance information and payment details; no Social Security numbers or laboratory results were reported compromised. BioReference was named in two related class actions, and potential losses were not estimable.
- OPKO disclosed the SEC’s January 2019 approval of a settlement resolving claims against the company, without admission or denial, including a $100,000 penalty and injunction related to Exchange Act Section 13(d). BioReference also faced government allegations regarding Medicare/TRICARE billing and electronic-health-record subsidies, alongside other audits, investigations and litigation; outcomes and potential losses were uncertain.
- Other notable items include $69.8 million of ordinary-course purchase commitments, potential acquisition milestone payments that may aggregate up to $159.1 million, and estimated Waterford facility construction and validation costs of $40–$50 million. The facility had incurred approximately $39.9 million through June 30, 2019.
Most important facts for investors to verify
- Whether BioReference stabilizes reimbursement, test volumes and margins, particularly for 4Kscore, and whether the proposed Medicare coverage policy or planned PMA submission changes the outlook.
- Whether operating cash burn moderates and the stated liquidity estimate remains adequate given line-of-credit constraints, debt service, purchase commitments and planned R&D and facility spending.
- Progress and cost-sharing arrangements with Pfizer for hGH-CTP, including regulatory strategy, development costs beyond the cap and impairment assumptions.
- Developments in the AMCA-related litigation, government billing investigations and other legal matters, including any estimable exposure, settlements or additional compliance requirements.
- Potential dilution and debt terms: the 2025 notes’ conversion provisions and the 29.25 million shares issued under the share-lending arrangement; the filing reports 615.6 million common shares outstanding as of July 30, 2019.
- Whether the BioReference covenant waiver conditions are met and whether cash availability remains sufficient under the revolving facility and borrowing-base requirements.